Pub. 11 2016-2017 Issue 4

www.nebankers.org 12 Extraordinary Service for Extraordinary Members. COUNSELOR’S CORNER T HE EMPLOYEE STOCK OWNERSHIP plan (ESOP) is a powerful tool that has been linked to im- proved company performance. The tax-preferred status of an ESOP has allowed hundreds of banks to cre- ate a culture of employee ownership while enjoying the benefits of certain tax advantages. What many bank own- ers don’t know is that an ESOP may also be used as an effective succession planning tool. Failing to properly plan for the suc- cession of any business invites disrup- tion and creates uncertainty for the future. This is especially true for banks because customers expect consistent and secure protection for their money well into the future. Banks that have a strong succession plan are likely to have better long-term performance. One common succession plan is for an owner to pass their ownership to their heirs. Unfortunately, sometimes an owner’s heirs are not as interested, or perhaps qualified, as the owner in running the business. Passing down ownership to one’s heirs also does not provide liquidity to the owner. Another common succession option is selling the company to an unrelated third party. While this option provides liquidity to the owner, many times the buyer will not be interested in main- taining the culture or employees of the business. The disadvantages of these two common succession options invite a third option—selling the bank to the employees. Current employees already may have demonstrated the interest and qualifications necessary to maintain the bank’s culture and success. In addition, selling the bank to employees allows employees to keep their jobs and provide confidence to the bank’s customers that the bank will survive long term. Selling the bank to employees also can provide liquidity to the owner. Often, however, this option is not available because most bank employees will not have ad- equate capital to finance a transaction. This is where an ESOP can be used to effectively transition the bank from the owners to the employees. An ESOP is a qualified retirement plan, very similar to a 401(k) plan, except that instead of investing in mutual funds and other traditional investments, an ESOP is designed to invest primarily in the stock of the employer. A basic ESOP transaction begins when a company creates the ESOP to buy the owner’s stock in the company. The shares of stock are then allocated from the ESOP to employees’ accounts within the ESOP over time. When an employee retires or termi- nates employment, he or she generally has the right to receive the stock or require the company to repurchase the stock. ESOPs provide advantages to help finance the purchase of the owner’s stock. First, employer contributions to an ESOP are tax-deductible. Banks can take advantage of this deduction in a number of ways. One way is to finance the buyout by making tax- deductible contributions to the ESOP over time. The ESOP will use these contributions to buy the owner’s stock in a piecemeal fashion until that per- son is ready to retire altogether from ownership. This financing method allows the owner to slowly transition away from ownership, while allowing the owner to continue to be involved in the operation of the bank. This struc- ture also allows the bank to control howmuch money is contributed to the ESOPs: A Solution to Bank Ownership Succession John Schembari, Kutak Rock LLP

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